Final answer:
An encumbrance indeed represents the estimated future liability for goods or services resulting from a purchase order or contract, which helps in budget management by reserving funds for expected expenses.
Step-by-step explanation:
An encumbrance in the context of accounting and finance does represent the estimated future liability for goods or services resulting from placing a purchase order or signing a contract. When an organization creates an encumbrance, it is acknowledging that it has committed to spending a portion of its budget on specific goods or services before it actually receives them. In essence, creating an encumbrance helps an organization manage its budget by reserving funds for expected expenses, which is a critical component of financial planning in business operations. It's important to note that while this act does not immediately affect cash flow, it does imply that the organization has entered into a commitment that will eventually lead to an outflow of funds.